Monthly Archives: September 2015

Knowing what the average is may not be as helpful as you think

One of the facts which often appears in personal finance surveys is that people tend to underestimate how long they will live. At a time when retirement provision is increasingly becoming a personal rather than state responsibility, that could mean running out of money before running out of life.

If you want an idea of what the average life expectancy for your age is, there are plenty of websites to help you. One of the simplest – and arguably most independent – comes from the Office for National Statistics (http://visual.ons.gov.uk/how-long-will-my-pension-need-to-last/), using the basis underlying UK population projections. For example, if you are a 55 year-old man, the site will tell you that your average life expectancy is 86 years. If you are a woman of the same age, you can add another three years to that figure.

All well and good, but these are averages and that means there is roughly a 50% chance you will live longer. Just how much longer could be a significant period. The ONS number crunchers say that a 55 year-old man has a 1 in 4 chance of reaching age 95 and again a woman can add another three years, bringing her to 98. There is 17.2% chance – roughly 1 in 6 – that the longer-living sex will survive until 100: for men the odds are 10.9% – still about 1 in 11.

Today’s 55 year-old will reach state pension age in about 11 years’ time, so even on the average numbers they will spend 20 or 23 years in retirement. Adding another nine years – the 1 in 4 chance – means an increase of nearly half for men.

Would your current pension provision last that long..? We are here to help with your pension planning – click here to get in touch with us.

The value of investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Global markets are providing investors a rough ride at the moment, as the focus turns to China’s economic outlook. But while falling markets can be worrisome, maintaining a longer-term perspective makes the volatility easier to handle.

A typical response to unsettling markets is an emotional one. We quit risky assets when prices are down and wait for more “certainty”.

These timing strategies can take a few forms. One is to use forecasting to get out when the market is judged as “over-bought” and then to buy back in when the signals tell you it is “over-sold”.

A second strategy might be to undertake a comprehensive macro-economic analysis of the Chinese economy, its monetary policy, global trade and investment linkages and how the various scenarios around these issues might play out in global markets.

In the first instance, there is very little evidence that these forecast-based timing decisions work with any consistency. And even if people manage to luck their way out of the market at the right time, they still have to decide when to get back in.

In the second instance, you can be the world’s best economist and make an accurate assessment of the growth trajectory of China, together with the policy response. But that still doesn’t mean the markets will react as you assume.

A third way is to reflect on how markets price risk. Over the long term, we know there is a return on capital. But those returns are rarely delivered in an even pattern. There are periods when markets fall precipitously and others where they rise inexorably.

The only way of getting that “average” return is to go with the flow. Think about it this way. A sign at the river’s edge reads: “Average depth: three feet”. Reading the sign, the hiker thinks: “OK, I can wade across”. But he soon discovers the “average” masks a range of everything from 6 inches to 15 feet.

Likewise, financial products are frequently advertised as offering “average” returns of, say, 5%, without the promoters acknowledging in a prominent way that individual year returns can be many multiples of that average in either direction.

Now there may be nothing wrong with that sort of volatility if the individual can stomach it. But others can feel uncomfortable. And that’s OK too. The important point is being prepared about possible outcomes from your investment choices.

Markets rarely move in one direction for long. If they did, there would be little risk in investing. And in the absence of risk, there would be no return. One element of risk, although not the whole story, is the volatility of an investment.

Look at a world share market benchmark such as the MSCI World Index, in US dollars. In the 45 years from 1970 to 2014, the index has registered annual gains of as high as 41.9% (in 1986) and losses of as much as 40.7% (2008).

But over that full period, the index delivered an annualised rate of return of 8.9%. To earn that return, you had to remain fully invested, taking the unsettling down periods with the heartening up markets, but also rebalancing each year to return your desired asset allocation back to where you want it to be.

Timing your exit and entry successfully is a tough ask. Look at 2008, the year of the global financial crisis and the worst single year in our sample. Yet, the MSCI World index in the following year registered one of its best-ever gains.

Now, none of this is to imply that the market is due for a rebound anytime soon. It might. It might not. The fact is no-one can be sure. But we do know that whenever there is a great deal of uncertainty, there will be a great deal of volatility.

Second-guessing markets means second-guessing news. What has happened is already priced in. What happens next is what we don’t know, so we diversify and spread our risk to match our own appetite and expectations.

Spreading risk can mean diversifying within equities across different stocks, sectors, industries and countries. It also means diversifying across asset classes. For instance, while shares have been performing poorly, bonds have been doing well.

Markets are constantly adjusting to news. A fall in prices means investors are collectively demanding an additional return for the risk of owning equities. But for the individual investor, the price decline only matters if they need the money today.

If your horizon is five, 10, 15 or 20 years, the uncertainty will soon fade and the markets will go onto worrying about something else. Ultimately what drives your return is how you allocate your capital across different assets, how much you invest over time and the power of compounding.

But in the short-term, the greatest contribution you can make to your long-term wealth is exercising patience. And that’s where your adviser comes in.

Source: MSCI

Article supplied by Dimensional Fund Managers

Other notes and risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily of the Firm and does not represent a recommendation of any particular security, strategy or investment product.

Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.

The value of investments and any income taken from them can go down as well as up. Exchange rates may cause the value of underlying investments to fall as well as rise. You may not get back the value of your original investment.

Past performance is not indicative of future results and no representation is made that any stated results will be replicated.

Any reference to taxation is based on our understanding of the current position, which may change in the future. The actual taxation may be affected by individual circumstances.

No reader should take any action based on the content of the publication without first obtaining personal advice from us or their own financial advisers.

The summer holiday month was anything but relaxing for investors in UK shares

As well as being the title of an Edna O’Brien novel, “August is a wicked month” probably sums up how many investors felt about the month. It was all going rather unexcitingly around the middle of the month, when the combination of a devaluation of the Chinese currency, the renminbi, and a plummeting Chinese stock market prompted share markets around the world to drop sharply.

In the UK, the usual “billions wiped off shares” headlines emerged, although when the market rallied in the closing days of the month, there were no corresponding “billions added to shares” headlines. As the graph below shows, over August the FTSE 100 (the red line) fell by 6.7%, having at one stage been down nearly 12%. The rollercoaster ride was less marked for the FTSE 250, which fell 3.2% over the month, with its biggest drop 8.3%.

The difference between the two indices is down to their differing constituents. The FTSE 100 may be a UK index, but it contains more than its fair shares of mining and oil & gas companies with little or no exposure to the UK economy. On the other hand, the FTSE 250 consists of the 250 medium-sized UK companies below the FTSE 100’s multinational behemoths and as a result is more closely linked to the UK’s fortunes. A fund manager concentrating on the FTSE 250 constituents should have fared better than his counterpart picking from the members of the FTSE 100.

The sharpness of the changes in the markets were all the more marked because conditions had hitherto been so calm: until mid-August the FTSE 100 had been largely confined to a band between about 6,500 and 7,000 since the start of the year.

One lesson of August is something many people find hard to accept: timing investment is virtually impossible. The August drop came out of nowhere and, at the time of writing, in many markets was partly unwound by the start of September. In such conditions, there is a lot to be said for making regular monthly investments and ignoring front page headlines, particularly when on holiday.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The proposal for a care cost cap in England has been put on hold

Back in 2011, the Dilnot Commission proposed a cap of £35,000 on lifetime personal liability for care costs. The Commission’s report was the latest in a long line of government enquiries into the thorny issue of funding long term care in England and at one point looked destined to join its predecessors in the long grass. However, while the then government did not accept Dilnot’s £35,000 figure, it did eventually propose a £72,000 ceiling on personal costs from April 2016. The necessary framework was legislated for in the Care Act 2014, along with a number of other important changes, notably a large increase in the upper capital limit for means testing to £118,000.

Less than ten months before these new rules were due to take effect, the Department of Health made a Friday announcement that they would be put on hold until April 2020. In a letter to the Chair of the Local Government Association, the Minister of State for Community and Social Care said “A time of consolidation is not the right moment to be implementing expensive new commitments such as this”. The comment is all the stranger when you remember that in March 2013 the Chancellor extended a freeze on the inheritance tax nil rate band for three years as “part of the package to fund a cap on reasonable care costs”. In the Summer Budget that freeze was extended for another three years to April 2021.

The Conservative’s election manifesto had said “we will cap charges for residential social care from April 2016”, so this was a serious U-turn. Some commentators suspect that the deferral was the first stage in a process of killing off the care cap completely. Ironically another government measure announced in the Summer Budget, the introduction of the Minimum Living Wage, is expected to push up social care costs significantly, adding to the long run cost of implementing the cap.

One of the lessons that can be drawn from this story is that your long term care is not something you can leave to the government: it needs to be integrated into your retirement planning so please get in touch with us – we can help.

The Governor of the Bank of England (BoE) is hinting at interest rate rises again

“It would not seem unreasonable to me to expect that once normalisation begins, interest rate increases would proceed slowly and rise to a level in the medium term that is perhaps about half as high as historical averages. In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.”

Those measured words, delivered by the BoE Governor Mark Carney in a lecture at Lincoln Cathedral, were the latest indication that the 0.5% base rate, born in March 2009, may not survive until its seventh birthday. Mr Carney has some unfortunate form in talking about interest rate rises, but in that all-too-dangerous phrase, this time it’s different. For a start, the rate of inflation will begin to pick up towards the end of the year, as last year’s sharp fuel price cuts drop out of the yearly figures. At the same time earnings growth has been increasing – the latest statistics show an annual increase (including bonuses) of 3.2%. Unemployment remains at relatively low levels and the figures for overall economic growth released in late July showed that the economy had bounced back from the first quarter’s disappointing 0.4% growth.

A further factor, although probably not one that the Bank would own up to, is that US interest rates also look set to rise by the end of the year. In a July presentation to the US Congress, Janet Yellen, Mr Carney’s American counterpart, suggested that the conditions for an interest rate increase (from a 0%-0.25% range) would arrive “sometime this year”. She also echoed Mr Carney’s view that once rates started to move upwards, the path would be gentle and rates would remain below the level viewed as “normal in the longer run”.

All of which means that your bank and building society are unlikely to pay you very much more interest on your deposits in 2016. However, unless you are an additional rate taxpayer, changes due in 2016/17 will mean you have up to £200 less tax to pay on your interest. If your need is income, then there are plenty of other options that can provide a higher income return. For example, the 2016/17 dividend reform announced in July’s Budget will allow you to receive up to £5,000 of dividend income with no tax to pay, regardless of your personal tax rate.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

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